New Internationalist

Where did all the money go?

Issue 358

Seemed like that 1990s’ bull market was just never going to stop. But it did. And it wasn’t pretty for lots of folks. They lost their jobs or were suckered into putting their retirement nest egg into a ‘sure thing’. Some of that wealth just seemed to vanish into thin air after those pumping the 40,000-point-Dow were revealed as mindless hucksters. But $4.7 trillion is a lot of green and some of it must have stuck to eager fingers on the way down. I had to find out the whos and hows.

THE ACCOUNTANTS

Amongst the avalanche of deregulation that purged companies of annoying safeguards was a 1978 rule that allowed major accounting firms to hire themselves out as lucrative consultants to corporations whose accounts they were also auditing. Soon exciting consulting outstripped sober auditing as a substantial source of income. For example PricewaterhouseCoopers (PwC) took $38 million in consulting fees from the now disgraced Tyco Corporation but just $13.2 million in auditing fees. Soon accountants were engaged in a game of wink and nod that saw an accounting firm like Andersen okay deals like that which buried Enron debt in off-books special partnerships. Andersen’s slogan to attract consulting clients had promised ‘Your profits will snap, crackle and pop.’

Well pop’s right anyway. Although Andersen bore the brunt of the resulting backlash there is virtually no major accounting firm that has not been fined or settled shareholders’ suits for lax auditing practices of their corporate clients. A 1998 internal investigation at PwC found 8000 cases of executives making investments in companies they audited.

ANALYSTS AND BROKERS

The 1990s was the age of the celebrity analyst. You may not have heard of Jack Grubman, Henry Blodget, Mary Meeker and Abby Joseph Cohen but thousands of small-time investors hung on the every word of these superstar ‘stock pickers’. In their salad days Grubman was working for the stockbroker Saloman Smith Barney and earning $20 million a year, while Blodgett over at Merrill Lynch pulled down a cool $12 million. Brokers in the same companies were making a mint in commissions selling the stocks hyped by their research departments. Multiply this by thousands of other analysts, brokers and companies and you get an idea of the volume. At the beginning of the 1990s ‘buy’ recommendations outnumbered ‘sell’ by 6 to 1; by the end of the decade it was 100 to 1. The same companies who employed the ‘stock pickers’ were also often engaged in investment banking, mergers and acquisitions and capital market decisions involving the companies whose stocks were being pumped. Yell ‘conflict of interest’ all you want! In many cases the stock pickers didn’t change their ratings until well after corporate meltdown was obvious even to chumps like me.

CEOS’ STOCK OPTIONS

Back in the 1980s somebody had the brilliant idea of rewarding the Chief Executives (and other corporate bigwigs) with stocks they could buy cheap to encourage them to hike stock value at all costs. The idea was as old as capitalism – harness private greed for the overall (corporate) good. But the beauty of a stock is its ‘liquidity’ – it can be sold whenever the bearer chooses – and that’s just how the Gordon Skillings and Ken Lays of Enron and a host of others played it. When their insider perspective allowed them to see trouble on the horizon they sold, and sold big, while at the same time encouraging ordinary chumps to continue to buy. Altogether US corporate executives are estimated to have walked away with some $66 billion during the 1990s’ boom and ended up selling their company stock before their companies crashed and burned.

THE DARK ARTS OF DERIVATIVES

At last count the murky world of ‘derivatives’ built around a series of complex trading interactions to ‘manage risk’ – or, in other words, betting on the future – is an $82.7 trillion business worldwide. It started in the 19th century in Chicago betting on ‘futures’ mostly in agricultural commodities but today has ballooned into a complex series of trades with its own arcane language: options, swaps, swaptions on everything from future currency and interest rates to the weather or the fate of Saddam Hussein. A huge amount of money has been made in commissions by derivative traders and by those who know how to ‘hedge’ risks effectively. But fortunes have also been lost, bringing to earth such venerable institutions as the Barings Bank in Britain and the highly regarded Long Term Capital Management in the US. The US financial guru Warren Buffett has denounced the instability of derivatives and their tendency to facilitate ‘huge-scale frauds and near frauds’.

PERKS FOR THE EXECS

At a time when buoyant stock value demanded wide-ranging layoffs and downsizing those at the corporate helm were coddled and had their ‘needs’ sympathetically tended. Insider loans (frequently forgiven) at attractive rates were made available to hard-pressed execs and their families. John Rigas and his kin pulled $3.1 billion out of Adelphia Communications, Bernie Ebbers $408 million out of WorldCom and the high-living Dennis Kozlowski got $88 million from Tyco. Sure, these guys had a lifestyle to maintain – Kozlowski alone had seven multi-million dollar homes to keep up, after all. Then there were the retirement packages and golden handshakes. Take Jack Welch, the legendary CEO of General Electric, under whose watch tens of thousands of workers lost their jobs. In addition to millions in lifetime income, Jack walked away with perpetual use of the company jet, apartments, maid service, limos, phones, country- club memberships and prime tickets to Wimbledon, the opera, the US Open and every New York Knicks home game.

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